Letter to Friedman

Tom Friedman had this column in Sunday’s NYT.  The basic point was that Obama should deal with the major problems of Detroit, Afghanistan, and banking with an eye toward fixing the underlying problems.  I sent this to him to further his point:

Great column today (Sunday). One thing to emphasize with both Detroit and the banks: bad decisions now will make things worse in the future.  And yes, they can be worse (see 1932).

The major reason the economy can, and will, get worse if we aren’t smart with the bailout money is that it is borrowed money.  Since the bailouts involving loaning money to companies, we citizens tend to think of ourselves as the big bankers assessing these companies with our charitable but scrutinizing hearts.  We forget, though, that just like most bankers, we’re not loaning our own money.  We’re loaning money we borrowed and had better pay back on time, or else…

These loans allow us to keep our economy alive in the short term, but like all loans, there is a time limit to their health-giving power.  Loans soothe short-term pain by re-packaging it as the risk of long term catastrophe.  This means that by borrowing money to give bailouts, we just made our short term situation less important and our medium term situation more important.  We don’t need to be marginally more healthy now, when our credit is good enough to borrow, we need to be considerably more healthy in the future when, if we aren’t healthy, we won’t have any credit to fall back on.  This means that any use of the money that doesn’t improve our fundamental economic health is not only “wasted” but is in fact endangering us at the time when we are most vulnerable — the future.

This is not to suggest that we should just let Detroit and many banks die on the spot.  Institutional stability plays an important role in the process of learning and innovating.  It is hard to grow anything in an environment of chaos.  But our goals cannot waiver: long term, sustainable growth.  And if that means short term pain, we need to accept that, because we still have a supply of pain relievers…. for now.